A Test of Weak-Form Market Efficiency in Australian Bank Bill Futures Calendar Spreads

Abstract

This paper demonstrates how the presence of a lower interest rate expectations detected in short-term interest rate futures during the 1990’s allowed arbitrage profits when trading intra-commodity spread differentials on the Sydney Futures Exchange’s 90 Day Bank Accepted Bill futures contract. Fama’s (1970) hypothesis on market efficiency cannot be accepted for the test period as statistically significant gross profits were generated by a naïve strategy. The EMH had greater predictive power once transactions costs were deducted. Furthermore, the EMH remained unable to be accepted after the allowance of generous transaction costs.